GCL System Integration Technology's (SZSE:002506) Returns On Capital Not Reflecting Well On The Business

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. In light of that, when we looked at GCL System Integration Technology (SZSE:002506) and its ROCE trend, we weren't exactly thrilled.

Return On Capital Employed (ROCE): What Is It?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for GCL System Integration Technology, this is the formula:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.034 = CN¥246m ÷ (CN¥21b - CN¥13b) (Based on the trailing twelve months to March 2024).

Thus, GCL System Integration Technology has an ROCE of 3.4%. In absolute terms, that's a low return but it's around the Semiconductor industry average of 4.1%.

View our latest analysis for GCL System Integration Technology

Historical performance is a great place to start when researching a stock so above you can see the gauge for GCL System Integration Technology's ROCE against it's prior returns. If you'd like to look at how GCL System Integration Technology has performed in the past in other metrics, you can view this free graph of GCL System Integration Technology's past earnings, revenue and cash flow.

The Trend Of ROCE

When we looked at the ROCE trend at GCL System Integration Technology, we didn't gain much confidence. To be more specific, ROCE has fallen from 5.6% over the last five years. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.

On a side note, GCL System Integration Technology's current liabilities are still rather high at 64% of total assets. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

The Bottom Line On GCL System Integration Technology's ROCE

In summary, despite lower returns in the short term, we're encouraged to see that GCL System Integration Technology is reinvesting for growth and has higher sales as a result. However, despite the promising trends, the stock has fallen 62% over the last five years, so there might be an opportunity here for astute investors. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

On a final note, we've found 1 warning sign for GCL System Integration Technology that we think you should be aware of.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.